Advanced financial
accounting solved question paper 2022
Dibrugarh University BCOM
5th SEM CBCS Pattern
5 SEM TDC DSE COM (CBCS)
502 GR-I
2022 (Nov / Dec)
COMMERCE (Discipline Specific Elective)
(For Honours and Non-Honours)
Paper: DSE-502 (Group-I)
(Advanced Financial
Accounting)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. (a) Fill in the blanks: 1x4=4
(1) Schedule-1
of banking companies deals with _______.
Ans: Share
capital
(2) Life
insurance business is carried on by Life Insurance Corporation of India since
_______.
Ans: 1956
(3) In case of
fire insurance, the provision for unexpired risk is maintained at 50%
of net premium.
(4) Period of
holding is a type of _______.
Ans: Investment
classification
(b) Write True
or False: 1x4=4
(1) Substandard,
doubtful and loss assets are types of non-performing assets.
Ans: True
(2) Life
insurance contracts are contracts of indemnity.
Ans: False,
contract of guarantee
(3) General insurance
policies are normally issued for long terms.
Ans: False
(4) Cum-dividend
price is not the real price of investment.
Ans: True
2.
Write short notes on (any four): 4x4=16
(a)
Slip system of posting in bank.
Ans: Slip (or Voucher)
System of Ledger Posting: The bank has to ensure
that customers (depositors) ledger accounts are up-to-date so that when a
cheque is presented to the bank for payment, the bank can immediately decide
whether to honour or dishonour the cheque. Thus transactions in the bank are
immediately recorded.
For this purpose, slip system of ledger posting is
adopted. Under this system entry are made in the (personal) accounts of
customers in the ledger directly from various slips rather than from subsidiary
books or journals and then a Day Book is written up. Subsequently, entries in
the accounts of the customers are tallied with the Day Book. In this way the
posting in the ledger accounts and writing of the day-book can be carried out
simultaneously without any loss of time. A slip is also called voucher. In
general, the types of slips used in bank book-keeping are: pay-in-slips,
cheques or withdrawals forms. In these
slips are filled by the customers there is much saving of time and labour of
the employees of the bank.
(b)
Insurance regulatory and development authority.
Ans:
(c)
Double insurance and reinsurance.
Re-Insurance
In general insurance there are risks which, because of
their magnitude or nature, one insurance company cannot afford to cover, e.g.
aviation insurance. Generally, in such cases, an insurance company insures the
whole risk itself and lays off the amount it has accepted to other insurance of
reinsurance companies, retaining only that much risks which it can absorb.
A reinsurance transaction may thus be defined as an
agreement between a ‘ceding company’ and a ‘re-insurer’ whereby the former
agrees to ‘cede’ and the latter agrees to accept a certain specified share of
risk or liability upon terms as set out in the agreement.
A ‘ceding company’ is the original insurance company
which has accepted the risk and has agreed to ‘cede’ or pass on that risk to
another insurance company or a reinsurance company. It may however be
emphasized that the original insured does not acquire any right under a
reinsurance contact. In the event of loss, therefore, the insured’s claim for
full amount is against the original insurer.
In other words, if an insurer is not willing to bear
the whole of the risk, it reinsures itself. Some risk retains with some other
insurer. This is called as reinsurance. Both re-insurer and original insurer
share the premium and risk in the same proportion and decided by them earlier.
Double insurance
Double insurance is the insuring of an individual, dependent, or
personal property by two or more insurance companies. Such dual insurance
allows those with coverage to claim the full amount from the policies; however,
the total claim cannot exceed the actual loss or cost associated with the
underwritten subject of the policies. Insurance companies are law bound to
honor double insurance policies, but the recipient of such policies must
satisfy certain eligibility requirements. Underwriters of double insurance
policies have the ability to reject or appeal certain claims based on deception
or unjust enrichment. Consequently, it is important that individuals insurable
under double insurance have an understanding of the independent insurance
policies that comprise their dual coverage and know the process for claims and
payouts.
(d)
Reserve for unexpired risks.
Ans:
Insurance Company, close their accounts on 31st
March but not all risks under different policies expire on that date. Many
policies extend into the following accounting year during which the risk
continues. Therefore, on the closing date there is an unexpired liability under
various policies which may occur during the remaining term of the policy beyond
the year and therefore, a provision for unexpired risks is made. This reserve
is based on the Net Premium income earned by the insurance company during the
year.
The effort involved in calculating unexpired portion
of premium under each policy is very time consuming. Therefore, a simple
formula to derive a percentage of premium income to be allocated to reserve for
unexpired risks is adopted.
According to the requirements of the Insurance Act, it
is sufficient if the provision is made for unexpired risks at 50 per cent for
Fire, Marine Cargo and Miscellaneous business except for Marine Hull which has
to be 100 per cent. It may be mentioned that the insurance companies are
governed by the provisions of Section 44 of the Income-tax Act, 1961. In this
regard, Rule 5 of the First Schedule to the Income-tax Rules – computation of
Profit & Loss of General Insurance Business – provides for creation of a
reserve for unexpired risks as prescribed under Rule 6E of the said Rules.
According to this Rule, the insurance companies are allowed a deduction of 50
per cent of net premium income in respect of Fire and Miscellaneous Business
and 100 per cent of the net premium income relating to Marine Insurance
business. In view of this the reserves are created at the rates allowed under
the Income-tax Act.
(e)
Cum-dividend and ex-dividend.
Ans:
The term ‘Cum’ and ‘Ex’ are Latin words. ‘Cum’
means with and ‘Ex’ means without. The term ‘Cum-dividend’ and ‘Ex-dividend’
relates to shares. Cum-dividend can be expanded as share price inclusive of
dividend and Ex-dividend can be expanded as share price exclusive of dividend. Cum
dividend is the amount of dividend accrued in the duration between the dividend
declaration date and the settlement date or transaction date. The cum-dividend
price includes not only the cost of investment but also includes the dividend
accrued upto the date of purchase, and when dividend is declared it would be
the right of the buyer to claim dividend. Conversely, the quotation,
Ex-dividend, covers only the cost of the investment and the buyer is liable to
pay additional amount as dividend accrued upto the date of purchase of Shares.
Also Read: Advanced Financial Accounting Past Exam Question Papers
NON-CBCS PATTERN: 2012 2013 2014 2015 2016 2017 2018 2019
Also Read: Advanced Financial Accounting Past Exam Solved Question Papers
3. (a) Discuss the following
items relating to a banking company: 3½
x 4=14
(1) Rebate on Bills Discounted.
Ans: Rebate on Bills Discounted
and its Accounting Treatment
Discounting of bills means making the
payment of the bill before the maturity date of the bill. While making payment
of the bill, the bank deducts discount for the unexpired period for the amount
of the bill discounted. Such discount is called rebate on bills discounted. It
is treated as interest received in advance. In profit and loss account, closing
balance of rebate on bills discounted is deducted and opening balance of rebate
on bills discounted is added with the interest and discount for the year.
Closing balance of rebate on bills discounted is shown as liability in balance
sheet under the heading ‘other liabilities’. At the commencement of next year,
a reverse entry is passed for the unexpired discount of the previous year
expiring this year and treated as income.
Rebate on bills discounted is calculated with the help
of following formula = (Total annual discount x no. of days after the close of
the year)/365.
Accounting
treatment of Rebate on Bill Discounted
a) At the end of current accounting period:
Discount on Bills A/c Dr.
To Rebate on Bills discounted A/c
b) At the beginning of next accounting period:
Rebate on Bills discounted A/c Dr.
To Discount on Bills A/c
c) Transferring balance of interest and discount
to Profit and loss Account:
Discount on Bills A/c Dr.
To Profit and Loss, A/c
(2) Cash Reserve Ratio.
Ans: Cash Reserve Ratio
All the banks operating in a
country, beside, cash in hand also maintain certain cash with the Central Bank
of the country. This is called cash reserve. In fact, maintenance of these cash
reserves has been made compulsory by the Law and the Central Bank has been
given the power to determine the percentage of cash to be kept as reserves.
This is termed as cash reserve ratio. In case of emergency these cash reserve
can be utilised by the banks to safeguard their liquidity position.
In India, under Sec 42(1) of the
Reserve Bank of India Act, 1934, every scheduled bank is required to maintain
with the Reserve Bank a minimum cash reserve as percentage of the time and
demand liabilities of the banks in India. The rate varies between 3% and 20%.
In practice the bank keeps a higher percentage of cash reserve with the RBI
then what the RBI prescribes at different times. The RBI pays interest on the
cash reserve maintained in excess of the statutory minimum of 3% at a rate
equivalent to the rate of interest payable by the banks in case of savings bank
deposit accounts. Present CRR is 4%.
(3) Pay-in-slip.
Ans: Pay-in-slip: When a customer deposits money with a bank, he has to fill-up a
printed pay-in-slip form and submit it to the ‘receiving cashier’ of the bank
along with cash. The form of pay-in-slip has two parts. The left-hand side
portion of the pay-in-slip is called ‘counterfoil’. It is returned by the
receiving cashier after the received and counts the cash. The counterfoil bears
signature of the receiving cashier and it is duly stamped with the rubber stamp
of the bank. Pay-in-slip serves as an acknowledgement of the deposit by the
customer with the bank. The remaining portion of pay-in-slip that is, its
right-hand side part remains with the bank for making entry in the cash book,
after which it is given to the ‘personal accounts ledger keeper’ for crediting
the ledger account of the customer.
(4) Standard Assets.
Ans: Standard assets: Standard
assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here it is also very
important that in this case the arrears of interest and the principal amount of
loan does not exceed 90 days at the end of financial year. If asset fails to be
in category of standard asset that is amount due more than 90 days, then it is
NPA and NPAs are further need to classify in sub categories.
Banks
are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing
and the reliability of the dues:
a)
Sub-standard Assets
b)
Doubtful Assets
c)
Loss Assets
Or
(b) From the
following information, prepare Profit & Loss A/c of Bharat Bank Ltd. for
the year ended on 31st March, 2022:
|
|
Rs. (‘000) |
|
Interest on Loans Interest on Fixed Deposits Commission Exchange and Brokerage Salaries and Allowances Discount on Bills Discounted Interest on Temporary Overheads
in Current A/cs Interest on Cash Credit Interest on Savings Bank
Deposits Postage, etc. Printing & Stationery Sundry Expenses Rent Taxes and Licenses Audit Fees |
300 275 10 20 150 152 30 240 87 10 20 10 10 15 10 |
Adjustments to be made:
(1) Rebate on bills discounted = Rs. 30,000.
(2) Salary to managing director = Rs. 30,000.
(3) Bad debts = Rs. 40,000.
(4) Provision for income tax to be made @ 40% (to be
rounded off to nearest thousands)
(5) Interest of Rs. 4,000 on doubtful debts was wrongly
credited to interest on Loans Accounts.
Solution: similar questions all points are same except some figure
PROFIT AND LOSS ACCOUNT of Vasari Bank Ltd
For the year ended 31st March, 2015
|
|
Schedule No. |
Year ended 31-3-2012 |
|
I.
Income: Interest Earned Other Income |
13 14 |
6,88,000 30,000 |
|
Total |
|
7,18,000 |
|
II.
Expenditure: Interest Expended Operating Expenses Provisions & Contingencies |
15 16 |
3,62,000 2,55,000 74,000 |
|
Total |
|
6,91,000 |
|
III.
Profit/Loss: Net profit for the year (I – II)
|
|
27,000 |
|
Total |
|
27,000 |
|
IV.
Appropriations: Transfer to Statutory Reserve @ 20% Dividend Balance carried forward |
|
5,400 15,000 6,600 |
|
Total |
|
27,000 |
SCHEDULE 13 – INTEREST EARNED
|
|
Amt. |
|
1.
Interest on Loan and advances, Discount
on bills (3,00,000 + 1,52,000 + 2,40,000 + 30,000 – 34,000) |
6,88,000 |
|
Total |
6,88,000 |
SCHEDULE 14 – OTHER INCOME
|
|
Amt. |
|
1.
Commission, Exchange and Brokerage |
30,000 |
|
Total |
30,000 |
SCHEDULE 15 – INTEREST EXPENDED
|
|
Amt. |
|
1.
Interest on Fixed Deposits, Saving Bank
Deposits |
3,62,000 |
|
Total |
3,62,000 |
SCHEDULE 16 – OPERATING EXPENSES
|
|
Amt. |
|
1.
Salaries and allowances 2.
Postage telegrams and stamp 3.
Printing and Stationery 4.
Sundry Expenses 5.
Rent 6.
Taxes and Licenses 7.
Audit fees 8.
Director fees and allowances |
1,50,000 10,000 20,000 10,000 15,000 10,000 10,000 30,000 |
|
Total |
2,55,000 |
Calculation of Provisions
& Contingency
|
|
Amt. |
|
Income:
Interest earned Other Income |
6,88,000 30,000 |
|
Less: Expenditure Interest expended Operating expenses |
7,18,000
3,62,000 2,55,000 |
|
Less: Provision for b/d |
1,01,000 40,000 |
|
|
61,000 |
Provision for tax = 61,000
x 55% = 34,000 (Rounded off to the nearest thousand rupees)
\Provisions and contingency = Provision for b/d + Provision
for tax = 40,000 + 34,000 = 74,000
Accounts of Banking Companies learning video
4.
(a) What is ‘life insurance’? What are the statutory and subsidiary books maintained
by a Life Insurance Company? 2+6+6=14
4. (a) Explain the following
relating to Life Insurance Company: 3½
x 4=14
(1) Surrender Value.
Ans: Surrender Value: The
term surrender value indicates the value that we receive from the insurance
issuer after we surrender the policy before maturity. Surrender, here, means
termination or cancellation of the life policy or returning the policy to the
insurance company before the stipulated time. The policy no longer exists after
the company clears off the payment to the policyholder. There can be a number
of reasons behind surrendering our policy. One of the most common reasons is
inability to pay the premiums. The policyholders often feel they have chewed more
than they can swallow. Surrendering our policy means we will not have to pay
premiums any further. When we terminate a policy, the company pays us certain
amount because we have paid premiums in the previous years of which a portion
has been used to cover risk, and another portion has been used as an
investment. The investment portion with its increased value will be returned to
us after deducting some termination charges. We might even get some bonus as
well. This amount is known as the surrender value. However, keep in mind that
the surrender value factor plays a key role in minimizing the bonus.
(2) Consideration for Annuities
Granted.
Ans:
Consideration for Annuities Granted: Any payment received by the insurance
company in lieu of granting annuity is called consideration for annuities
granted. An annuity consideration may be made as a lump sum or as a series of
payments, often referred to as contributions. It is source of income of
insurance companies and shown as income in the revenue account of the insurance
companies.
(3) Valuation Balance Sheet.
Ans: The balance in the life assurance fund cannot be taken as the
profit made by the life insurance business. For the purpose of ascertaining the
profit, the insurance company should calculate its net liability as per actuary
and compared it with life assurance fund on a particular date in order to
calculate the surplus/deficiency. This comparison is made by preparing a
valuation Balance Sheet. If the life insurance fund is more than the net liability,
the difference represents the surplus. On the other hand, the excess of net
liability over the life assurance fund represents deficiency for the
inter-valuation period. A specimen form of valuation balance sheet is given as
follows:
Valuation Balance Sheet
As on date…………………………….
|
To Net Liabilities per actuary’s valuation To Surplus |
|
By Life Assurance funds as per Balance Sheet By Deficiency |
|
Only surplus (and not deficiency) will be shown in the
Balance sheet. With profit policyholder have a right to participate in the
profit of life insurance business to the extent of 95% of true profit and
remaining 5% is shareholder’s share. For calculation of true profit, surplus as
disclosed by valuation Balance Sheet must be adjusted by:
a)
Adding interim bonus (if any)
as it is really advance payment of bonus.
b)
Deducting any expenses still to
be incurred.
Out of 95% of true profit, interim bonus already paid
should be deducted to calculate the amount due to the policyholder.
(4) Life Assurance Fund.
Ans: Concept
of Life fund of an Insurance Company
Life Fund, also known as Life Assurance Fund is
concerned with Life Insurance (Assurance) business. It is an item that appears
on the liability side of the company's Balance Sheet. For insurance business,
claim is an expenditure while premium is an income. As we all know, the
difference between income (premium received) and expenditure (claims paid)
should be the profit. In case of life insurance business this approach would
pose a problem.
The income premium, is collected periodically
(monthly, quarterly, annually) on policies that mature over a long period of
time. The expenditure claim, has to be paid either on the maturity of the
policy or on the death of the policy holder. Claim as an expenditure is
definite while premium as an income is uncertain. The expected amount of
premium on a policy will be received only if the policy holder is alive up to
the maturity of the policy.
Therefore, life
insurance companies treat the difference between income and expenditure as
a surplus and not profits. This surplus from
the revenue account is transferred to the Life Fund, where it gets
accumulated. Life fund is shown in schedule – 6 of the balance sheet under the
head “Reserves and Surplus”.
Or
(b) (1)
Following figures are extracted from the books of Bright Life Assurance Co.
Ltd. for the year ended on 31st March, 2022: 10
|
|
(Rs.) |
|
Premium less Reinsurance Premium
Claims less Reinsurance Claims Reinsurance Irrecoverable Consideration for Annuities
Granted Annuities Paid Surrenders Commission Surplus on Revaluation of
Reversions Interest, Dividends and Rents Income Tax Management Expenses |
42,90,000 25,50,000 12,000 1,20,000 37,500 2,40,000 1,65,000 15,000 21,00,000 3,30,000 5,25,000 |
The net liability on all contracts in force as on 31st March, 2022 was Rs. 72,00,000 and on 31st March, 2021, the liability was Rs. 63,00,000. You are required to prepare Revenue A/c according to the IRDA Regulations, 2013. (Note: Schedules need not be prepared)
Mutual
Life Assurance Co. Ltd.
Revenue
A/c
For
the year ended 31-03-2012
|
Particulars
|
S. No. |
Amount |
|
Premium
Earn (net) Income Form
Investment: -Interest,
Dividends & Rent -Surplus on
Revaluation of reversions Other
Income: -Consideration
for annuities |
1
|
42,90,000
21,00,000 15,000
1,20,000 |
|
Total (A) |
|
65,25,000 |
|
Commission Operating
Expenses relating to Insurance business Re-assurance
Irrecoverable Income Tax |
2 3 |
1,65,000 5,25,000 12,000 3,30,000 |
|
Total (B) |
|
10,32,000 |
|
Benefit
paid (net) (25,50,000+37,500+2,40,000) Change in
liability in respect of life policies (72,00,000
– 63,00,000) |
4 |
28,27,500
9,00,000
|
|
Total (C) |
|
37,27,500 |
|
Surplus (A
– B – C) |
|
17,65,500 |
(2) Distinguish between Life Insurance and General Insurance. 4
Ans: Difference between Life insurance and
General Insurance 2022
|
Basis of difference |
Life Insurance |
General Insurance |
|
Subject Matter |
The subject matter of
insurance is human life. |
The subject matter is any
physical property, assets, ship or cargo etc. |
|
Element |
Life Insurance has the
elements of protection and investment or both. |
General insurance has only
the element of protection and not the element of investment. |
|
Insurable Interest |
Insurable Interest must be
present at the time of affecting the policy. |
Insurable interest on the
subject matter must be present both at the time of effecting policy as well
as when the claim falls due. |
|
Duration |
Life Insurance policy usually
exceeds a year and is taken for longer period ranging from 5 to 30 years or
whole life. |
General insurance policy
usually does not exceed a year. |
|
Indemnity |
Life insurance is not based
on the principle of indemnity. |
General insurance is a
contract of indemnity. The insured can claim only the actual amount of loss
from the insurer. |
|
Loss measurement |
Loss is not measurable. |
Loss is measurable. |
|
Surrender value or paid up
value |
Life insurance policy has a
surrender value or paid value. |
General insurance does not
have any surrender value or paid up value. |
|
Contingency of risk |
There is an element of
certainty. |
There is an element of
uncertainty and there may be no claim. |
5. (a) From the following information as on 31st March,
2022 of Luit Fire Insurance Co. Ltd., prepare Revenue A/c reserving 40% of the
net premiums for unexpired risks and an additional reserve of Rs. 3,50,000: 14
|
|
(Rs.) |
|
Reserve for unexpired risk on 31st
March, 2021 Additional reserve on 31st
March, 2021 Claims paid Estimated liability in respect
of outstanding claim on 31st March, 2021 Estimated liability in respect
of outstanding claims on 31st March, 2022 Expenses of management
(including Rs. 45,000 in connection with claims) Reinsurance premium paid Reinsurance recoveries Premiums Interest and dividend (gross) Profit on sale of investments Commission |
7,50,000 1,50,000 9,60,000 97,500 1,35,000 4,20,000 1,12,500 30,000 16,80,000 75,000 15,000 1,75,000 |
Or
(b)
(1) Point out the main features of accounts of General Insurance Companies. 4
Ans:
Insurance contracts that
do not come under the ambit of life insurance are called general insurance. The
different forms of general insurance are fire, marine, motor, accident and
other miscellaneous non-life insurance. The tangible assets are susceptible to
damages and a need to protect the economic value of the assets is needed. For
this purpose, general insurance products are bought as they provide protection
against unforeseeable contingencies like damage and loss of the asset. Like
life insurance, general insurance products come at a price in the form of
premium.
Features of
General Insurance Companies:
a)
General Insurance policy is a
contract of indemnity in which the insurer agrees to reimburse only the actual
loss suffered subject to the average clause.
b)
General Insurance contract is
for a short period usually a year.
c)
The subject matter is any physical property, assets, ship or cargo
etc.
d)
General insurance has only the element of protection and not the
element of investment.
e)
Insurable interest on the subject matter must be present both at the
time of effecting policy as well as when the claim falls due.
(2)
What are statutory books required to be maintained by General Insurance Company
under the Insurance Act? 5
Ans:
Books maintained by All Insurance Companies
Under the Insurance Act, 1938 it is obligatory on the
part of all insurance companies including the general insurance companies to
maintain the following books which may be called ‘statutory books’.
1.
The registrar of policies: This
book contains the following particulars in respect of each policy issued:
a)
The name and address of the
policyholders.
b)
The date when the policy was
affected.
c)
A record of any assignment of
the policy.
2.
The registrar of claims: This
book should contain the following particulars in respect of each claim:
a)
The date of claim.
b)
The name and address of the
claimant.
c)
The date on which the claim was
discharged.
d)
In the case of a claim which is
rejected, the date of rejection and the ground for rejection.
3.
The register of licensed
insurance agents: This book should contain the following particulars in respect
of each agent:
a)
Name and address of every
insurance agent appointed.
b)
The date of appointment.
c)
The date on which appointment
ceased, if any.
In addition to the statutory books mentioned above,
insurance companies also maintain the following subsidiary books for recording
the transactions:
a)
Proposal register.
b)
New premium cash book.
c)
Renewal premium cash book.
d)
Agency and branch cash book.
e)
Petty cash book.
f)
Claims cash book.
g)
General cash book.
h)
Agency credit journal.
i)
Agency debit journal.
j)
Lapsed and cancelled policies
book.
k)
Chief journal.
l)
Commission book.
m)
Agency ledger.
n)
Policy loan ledger.
o)
General loan ledger.
p)
Investment ledger.
(3)
How is the profit or loss of a General Insurance Company ascertained? 5
Ans: Determination of Profits in case
of general insurance companies
Ascertainment of profit under General Insurance
Business. General insurance policies are normally issued for short terms
renewable every year. It is quite possible that on the accounting date, some of
the contracts are still alive and hence represent unexpired risk. A suitable
provision is made for that unexpired risk on a generalized basis as it is
impractical to create it for specific policies. Sometimes an additional
provision is also created. The total of reserve for unexpired risk and
additional risk is collectively termed as ‘Respective Fund’ which may be fire
fund, marine fund, motor vehicle fund, etc. The revenue account starts and ends
with respective value of the fund besides recording normal revenue and expenditure.
The difference of the account is called profits or loss and is transferred to
Profit and Loss Account.
Reserve for
unexpired risk and its significance at the time of calculating profits
Insurance Company, close their accounts on 31st
March but not all risks under different policies expire on that date. Many
policies extend into the following accounting year during which the risk
continues. Therefore, on the closing date there is an unexpired liability under
various policies which may occur during the remaining term of the policy beyond
the year and therefore, a provision for unexpired risks is made. This reserve
is based on the Net Premium income earned by the insurance company during the
year.
The effort involved in calculating unexpired portion
of premium under each policy is very time consuming. Therefore, a simple
formula to derive a percentage of premium income to be allocated to reserve for
unexpired risks is adopted.
According to the requirements of the Insurance Act, it
is sufficient if the provision is made for unexpired risks at 50 per cent for
Fire, Marine Cargo and Miscellaneous business except for Marine Hull which has
to be 100 per cent. It may be mentioned that the insurance companies are
governed by the provisions of Section 44 of the Income-tax Act, 1961. In this
regard, Rule 5 of the First Schedule to the Income-tax Rules – computation of
Profit & Loss of General Insurance Business – provides for creation of a
reserve for unexpired risks as prescribed under Rule 6E of the said Rules. According
to this Rule, the insurance companies are allowed a deduction of 50 per cent of
net premium income in respect of Fire and Miscellaneous Business and 100 per
cent of the net premium income relating to Marine Insurance business. In view
of this the reserves are created at the rates allowed under the Income-tax Act.
Additional
reserve for unexpired risk
Ø In a particular year the management may feel that the percentage of
premium recommended by the General Insurance Council is not sufficient to meet
the unexpired risks. In such a situation they may provide additional reserve.
Such additional reserve for unexpired risk will also be debited to the revenue
account.
Ø The balance will be shown in the balance sheet as in the case of
normal reserve for unexpired risk, and will be transferred to the credit of
next year’s revenue account.
Treatment of
reserves for unexpired risk: Reserve for unexpired
risk is adjusted with premium earned in schedule – 1 of the Revenue account of
a general insurance company. Difference in opening and closing balance of
reserve for unexpired risk is calculated and increase in reserves during the
year is deducted with premium earned or vice-versa. In balance sheet, reserve for unexpired risk
is shown in schedule – 14 under the head provisions.
6.
(a) (1) What is an Investment A/c? How is it prepared? Point out the special
features of an Investment A/c. 2+3+3=8
Ans: Investment
Accounts: The accounts of investments are kept in the same way as the
accounts of any other asset. A separate investment account should be opened for
each kind of security and on the head of the account particulars regarding the
nature of the security, dates when interest or dividend is due, the date of
redemption etc. should be stated. When the number of investments carried is
large, a separate investment Ledger is employed for recording all investment
accounts.
Features of
Investment accounts:
1. It is a real account.
2. Investment account is divided into three columns.
First column shows nominal value of investment, second column show interest and
dividend and third column shows cost of investment or sale proceeds of
investment.
Preparation of
Investments Account
Concerns holding a large number of investments may
find it more convenient to use a separate ledger called an Investment Ledger,
for keeping the accounts of all their investments. Such a ledger is kept on the
columnar system and is ruled differently from an ordinary ledger. As the
issuing authority of a security pays interest to the holder at a certain rate
calculated on its face value, it is desirable that the face value (also known
as the nominal value) as well as the interest or dividend received should
appear side by side with the capital invested in it. Therefore, the investment
Ledger is provided with three columns on either side headed ‘Nominal Value’,’
Interest or Dividend’ and ‘Capital or Principal’. The name of each investment
is written at the tip of the account followed by the rate of interest or
dividend and the dates on when it is payable; when an investment is purchased
“cum-dividend”, ‘ex-dividend” its cost is analyzed into the nominal price and
the dividend or interest accrued and as entry is made on the credit side of the
Cash Book, from where it is posted to the respective columns on the debit side
of the particular Investment Account in the Investment Ledger. When the whole
or part of the investment is sold, the price received, similarly split up into
the nominal price and the dividend or interest accrued, is entered on the debit
side of the Cash Book, from where it is posted to the respective columns on the
credit side of the particular Investment Account in the Investment Ledger.
Expenses by way of brokerage, stamps etc., will be debited to the capital
account. When dividend or interest accrued on an investment is received, it is
first entered on the debit side of the Cash Book and then posted to the credit
side of the particular Investment Account in the ‘Dividend or Interest’ column
in the investment Ledger. At the close of the financial year, the dividend or
interest accrued on different investments, but not received, is brought into
account by crediting the ‘Dividend or Interest’ columns of the different
Investment accounts in the Investment Ledger and bringing down such balances as
an asset after the accounts have been balanced.
The first column is of Nominal Value and in it on the
credit side is entered the nominal value of investments on hand and the totals
on both sides will then agree.
The second column is of Interest or Dividend and it
will always show a credit balance representing interest or dividend on
investments for the period and it will be carried to Profit and Loss Account.
The third column is for Capital or Principal. In this
column against the closing balance will be entered the value of securities is
hand and the difference of the two sides will show profit or loss on the sale
of investments during the period. Value of securities in hand is the lower of
cost and fair values as per Para 14 of AS – 13.
Balancing the
Investment Account
When the whole of an investment has been sold, the
difference between the two sides of an Investment Account will be profit or
loss on the sale. Where only part of an investment has been sold during the
year, the cost of the remaining investment will be brought down as a balance in
the Investment Account and the difference between its two sides will be profit
or loss on the investments sold. When the investment is a fixed asset, any
profit or loss made on the sale thereof will be of a capital nature and should
be treated accordingly.
(2)
How are stock exchange transactions (sale and purchase of securities) recorded
in books? 6
Ans: Concerns holding a large number of investments may find it more
convenient to use a separate ledger called an Investment Ledger, for keeping
the accounts of all their investments. Such a ledger is kept on the columnar
system and is ruled differently from an ordinary ledger. As the issuing
authority of a security pays interest to the holder at a certain rate
calculated on its face value, it is desirable that the face value (also known
as the nominal value) as well as the interest or dividend received should
appear side by side with the capital invested in it. Therefore, the investment
Ledger is provided with three columns on either side headed ‘Nominal Value’,’
Interest or Dividend’ and ‘Capital or Principal’. The name of each investment
is written at the tip of the account followed by the rate of interest or
dividend and the dates on when it is payable; when an investment is purchased
“cum-dividend”, ‘ex-dividend” its cost is analyzed into the nominal price and
the dividend or interest accrued and as entry is made on the credit side of the
Cash Book, from where it is posted to the respective columns on the debit side
of the particular Investment Account in the Investment Ledger. When the whole
or part of the investment is sold, the price received, similarly split up into
the nominal price and the dividend or interest accrued, is entered on the debit
side of the Cash Book, from where it is posted to the respective columns on the
credit side of the particular Investment Account in the Investment Ledger.
Expenses by way of brokerage, stamps etc., will be debited to the capital
account. When dividend or interest accrued on an investment is received, it is
first entered on the debit side of the Cash Book and then posted to the credit
side of the particular Investment Account in the ‘Dividend or Interest’ column
in the investment Ledger. At the close of the financial year, the dividend or
interest accrued on different investments, but not received, is brought into
account by crediting the ‘Dividend or Interest’ columns of the different
Investment accounts in the Investment Ledger and bringing down such balances as
an asset after the accounts have been balanced.
Or
(b)
Mr. Manohar furnishes the following details relating to his holding in 6%
Government Bonds of Rs. 100 each:
Opening
balance face value Rs. 60,000 cost of which Rs. 59,000.
|
01/03/2021 01/07/2021 01/10/2021 01/11/2021 |
100 units purchased ex-interest at Rs. 98. Sold 200 units’ ex-interest out of the original holding
at Rs. 100. Purchased 50 units at Rs. 98 cum-interest. Sold 200 units’ ex-interest at Rs. 99 out of the
original holdings. |
Interest
dates are 30th September and 31st March. Mr. Manohar
closes his books every 31st December. Show Investment A/c as it
would appear in his books. 14
Ans:
Same Question asked in 2018
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